Growth investing and value investing are two distinct investment strategies. Typically, value stocks offer the option to purchase shares at a discount to their actual worth, whereas growth stocks offer above-average returns and earnings growth potential. Although choosing one type of stock over the other is not required, each approach tends to have its own loyal base of investors. This article explains value stocks and growth stocks and highlights the key differences between Growth vs Value Stocks.
What are Growth Stocks?
Growth stocks are stocks of companies that have achieved better-than-average rises in earnings in previous years. And these stocks are likely to continue generating strong levels of profit growth, although there is no guarantee. Emerging growth stocks are those that have the potential to produce high profits growth but have not established a history of great earnings growth yet.
Typically, growth stocks tend to outperform their peers and the markets. This is fully reflected by the premium value these stocks demand on the market. Growth stocks do not offer regular dividends since they prefer to reinvest their revenues in business expansion. Moreover, companies with growth stocks are newer and less established than others. Their objective is to acquire as much market share as possible. They tend to achieve this by corporate expansion.
Following are the features of growth stocks:
- Stock price higher than the broader market: Investors are willing to pay high price to earnings multiples as they expect to sell them at even greater prices as the companies continue to expand.
- High historical earnings: While the profitability of some companies may have an impact during periods of slower economic expansion, growth companies may potentially continue to generate strong earnings growth regardless of economic conditions.
- Volatility: The risk in buying a certain growth stock is that it can be highly volatile. Simply put, the prices may fall as a result of any unfavourable news about the firm.
How to Identify?
Look for companies that are consistently generating above-average earnings growth. This is the primary characteristic of growth stocks. Typically, these stocks do not have a long history of enormous gains, but they have the potential for rapid development. Due to greater volatility, growth stocks come with a greater risk.
What are Value Stocks?
Value stocks are stocks of companies that are not yet popular among investors and have strong fundamentals. The value category may also contain shares of unrecognised, up-and-coming enterprises. Value stocks lack superior growth characteristics. They are typically characterised by stable, predictable business models that deliver modest sales and earnings growth over time. Sometimes you may find value stocks that are declining. The stock price is so cheap that it significantly understates its future profit potential.
Following are the features of value stocks:
- Less expensive than the broader market: The premise of value investing is that stocks of good companies would rebound over time if and when other investors see their potential and true value.
- Low price as compared to competitors in the industry: Most value investors are of the opinion that the value stocks are created as a result of investors’ response to recent company troubles, such as disappointing profits, negative publicity, or legal issues. They feel all of these may cast doubt on the company’s long-term prospects.
How to Identify?
To uncover value stocks, you might conduct a comparison between the market valuation and the company’s intrinsic value. Using data such as financial accounts, business models, and the company’s overall competitive position, you can determine the stock’s underlying value. If a company’s current market price is less than its intrinsic value, the stock is considered a value stock.
It may be a tedious process; you can look for expert opinions and suggestions on a variety of websites. Value investing is more suitable for longer-term investment horizons.
Value Stocks vs Growth Stocks
Following are the key differences between Value Stocks vs Growth Stocks.
|Basis of Difference||Value Stocks||Growth Stocks|
|Pricing||Value stocks are undervalued equities with superior growth and return possibilities. They’re cheaper than similar stocks in the market (i.e. peer stocks). Investing in inexpensive (undervalued) stocks that can create money when the market corrects its price is called value investing.||Due to their high growth rate, growth stocks are often expensive, i.e., overvalued. Sometime they may be rightly valued. Investing in growth stocks is called growth investing.|
|Investment Ratios||Undervalued value stocks have lower valuation ratios. Low P/E ratio.||Growth stocks have greater P/E, P/B, and EPS.|
|Valuation Metrics||Book Value, Dividends, and Cash Flows.||EPS, Profit Margins, ROE, and Growth Rate.|
|Risk||When the market corrects, value stocks should gain value. Investors lose money if the stock doesn’t appreciate as planned. Thus, value stocks are riskier than growth stocks.||High-growth stocks are less risky because their growth rate is rising. They are less responsive to the economic conditions than the market. Thus, growth stocks are slightly less risky.|
|Business Profile||Value stocks may be large corporations that are undervalued due to unfavourable earnings season, bad PR, etc., but acquire value over time.||Up-coming firms (small to mid) are growth stocks. Such companies introduce something new to the market and are flourishing due to their USP and competitive advantage.|
|Dividends||Value stocks pay dividends and don’t invest all of their retained earnings back into the company.||Growth stocks rarely pay dividends. Because such companies reinvest all retained earnings in the company.|
|Growth Potential||Low to moderate||High|
|Investment Horizon||Long term||Short to long term|
What Should You Pick Value Or Growth Stocks?
Both value and growth stock investment can be profitable. There is no set principle to invest; it largely depends on the investor’s expertise and preferences.
Growth stocks have the potential to deliver investors multi-bagger returns, and capital appreciation isn’t capped to the company’s value. As long as the company keeps growing, its valuation will rise.
Value investing is a safer investment strategy to buy stocks at a discount to their true worth. These firms offer reliable dividends and good returns.
Overall, establishing which stock is superior depends on the investor’s personal preferences, risk tolerance levels, investment duration, and stock-picking method. To limit risk and increase returns, having a blend of value and growth stocks in your portfolio is advisable. You can simply enjoy the best of both worlds.